Another taper for Bank of Canada at Wednesday's meeting?

On Wednesday we have a Bank of Canada (BoC) meeting where the market expects another a round of tapering to occur, bringing its weekly asset purchases down from C$3 bln to C$2 bln a week. This should keep rate differentials moving in CAD’s favour. USDCAD’s move higher off 1.20 should give the BoC more confidence to ease some pressure off the stimulus accelerator. On Friday, data released pointed to Canada making gains in the labour market of 231k jobs for the month of June, comfortably above expectations of 175k. If we continue at this clip employment will be back to pre-covid levels shortly. Besides a strong labour market, inflation is above target, 67.93% of the population has been vaccinated with the first dose and 35.91% are fully jabbed, social distancing is being relaxed with mobility increasing aggressively and lastly a booming housing market really does create fertile ground for a pulling back on the stimulus reigns. This should also skew the economic projections to be released at this meeting to the upside with the balance tilted toward positive revisions. Given tapering is largely priced in, currency movement will most likely come from the tone in the meeting and updated forecast revisions. One risk to bullish price movement for CAD is what happens in crude markets. So far oil is managing to continue its bullish trend, but its price direction remains at the whims of OPEC+.

Technically, the cup and handle formation played out to perfection as indicated by the yellow rounding base. On July 8 we saw price get just below 1.26 and sellers came in and pushed the pair lower. The 200-day SMA is not far away from that. For now price has found support at the 1.243 zone and Wednesday’s meeting if hawkish could see us breach this level potentially. Price would also have to contend with the downtrend line which could now act as support as well as the 21-day EMA. Would does work in USDCAD bears favour is the negative divergence currently showing buying momentum is not as strong on pushes higher. The RSI is also still above 56 support line. Upside targets to keep an eye on would be the previous high at 1.26 and the 200-day SMA at 1.263. On the downside I’d monitor 1.237 (21-day EMA) and then the 1.23 area which has some support.